+44(0)20 7638 9271

Landlords and Redevelopers beware!

The effect of the new business rates on statutory compensation

All Landlords/Developers of commercial property occupied by a tenant protected by the Landlord & Tenant Act 1954 (a business tenancy) should be considering their budgets in light of the forthcoming business rates revaluation. See the example below as to how this might affect you.

Those Landlords/Developers who successfully recover vacant possession of their property by bringing a protected tenancy to an end or opposing a tenant’s request for a new business tenancy, relying on the redevelopment ground (S.30(1)(f) the 1954 Act) and are obliged to pay statutory compensation to their protected tenant.

The amount of that compensation is based on the valuation list in force at the date that either of the following notices are served under the Act:-

  • A Landlord’s Notice ending a business tenancy (Section 25 Notice); or
  • A Landlord’s Counter Notice opposing a tenant’s request for a new tenancy (Notice pursuant to Section 26(6)).

Business Rate Re-valuation

  • The Valuation Office Agency (VOA) sets the rateable value of all business properties.
  • New rateable values, released by the VOA on 30 September 2016, are based on the rental value of properties on 1 April 2015. These will be used to calculate business rate bills from 1 April 2017.
  • Many tenants of business properties know that they are facing changes in their business rates, some with substantial increases and some with minor decreases although overall the changes are said to be revenue neutral.

Timing

Service of a Section 25 Notice by a Landlord can only take place in a window during the last 6 – 12 months of the term of the lease.  Equally a Counter Notice must be served within two months of receipt of a tenant’s Section 26 Notice.

31 March 2017 is the last day on which the old valuation list will be in force. The timing of serving either the above notices could significantly affect the amount of statutory compensation that a Landlord will have to pay a business tenant protected by the 1954 Act.

Example

A Landlord is looking to recover vacant possession of its high street property to implement a scheme of redevelopment. The current tenant, a national retailer, holds a ‘business tenancy’ protected by the Landlord & Tenant Act 1954. 

The lease was granted on the September quarter 2002 and is coming to an end on 28th September 2017. Rateable value is currently £123,000 but will be increasing to £146,000 with effect from 1 April 2017.

The Landlord wishes to serve a Section 25 Notice to bring the tenant’s lease to an end, opposing the grant of any new lease on the basis it intends to redevelop and needs vacant possession to do so.

If that notice were to be served before 28th March 2017 to bring the lease to an end on its term date of 28th September 2017 (minimum of 6 months notice required) the old valuation list would apply. As the tenant has been in occupation for more than 14 years, 2x Rateable Value would apply at the old Rateable Value i.e. 2x £123,000.

However, if the Landlord were to wait until after 1st April 2017 e.g. to finalise its plans the new Rateable Value would apply i.e. 2x £146,000. Any delay by the landlord could cost an additional £46,000 in compensation. A landlord only needs to prove its firm and settled intention to redevelop at trial.

In the same circumstances, a tenant knowing that its landlord wishes to redevelop could serve a Section 26 Notice before 28th March requesting a new lease at the end of the current term. The landlord should be quick to respond countering on the redevelopment ground to catch the old Rateable Value, bearing in mind a landlord has 2 months to reply andy delay could prove costly if that reply is served after 1st April as the new, higher, Rateable Value will apply.

Benjamin LomerSenior Associate

 This briefing was posted on 6 March 2017.

Disclaimer: The content of this article does not constitute legal advice but is intended as general guidance only.